Retirement planning and financial incentives: The impact of announced cuts in pensions

  • Stefanos Tyros Stefanos Tyros

We investigate the response of old age households in the Netherlands to the abolishment of the state pension partner supplement – a pension cut a ecting households with a low income younger partner. The discontinuation of the supplement took place on April 2015, following a 20 year announcement period. The dataset available allows us to probe the households’ response before being subjected to the income shock. Life-cycle theory predicts that upon announcement households readjust their consumption and labour supply paths in order to smoothen them. Behavioural extensions, as well as lack of information and liquidity constraints, can alter these predictions. Previous empirical estimates have found no or small wealth e ect on retirement decisions. We investigate three channels of response: a labour supply response of the older partner through means of delaying retirement, a labour supply response of the younger partner and a response in the savings rate of the household. The setup of our analysis is unique for a number of reasons. First, we used microdata from tax returns that allows us to calculate e ects with big accuracy. Second, the wealth shock is large (around 70,000e for an average household with a young partner with very low or no income), it depends on the age difference of the partners and
is targeted to households with a younger low income partner. Third, the sample is rather diverse, as the income of the older partner and the household wealth are unconstrained. Fourth, there was an active campaign in order to inform the public of the policy change. Fifth, the announcement period was large, allowing households to alter their behaviour well in advance of the shock and, sixth, the dataset allows us to probe a variety of response channels. For all these reasons, our analysis constitutes a test on the hypothesis of a zero marginal propensity to consume future income, under the mental accounting
framework. We employ a differences-in-differences-in-differences setup and nd no effect due to the supplement abolishment in any of the three channels. A negative effect on the labour supply of the younger partner and the household savings, present for households with a high-income younger partner as well, is attributed to a reform of the occupational
pension funds enacted at the same date.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.


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